In a SAFE vs Convertible Note, Who Bears the Dilution?

In the safe vs convertible note decision, the market has chosen: convertible notes made up a record low of 7% of pre-seed rounds on Carta between January and March 2026. The SAFE drops the note’s interest, maturity date and usury exposure. Its post-money form also fixes each investor’s percentage, so founders absorb every later SAFE.

A SAFE note, short for simple agreement for future equity, is a contract in which an investor pays now for shares issued at a later priced round. It carries no interest and no repayment date. Y Combinator published it in 2013 to spare founders the burdens of debt, and redesigned it in 2018. The differences between the two instruments now show up in three places: the cap table, the audited accounts and, for notes, state usury law.

Safe vs convertible note: what each instrument fixes, and who carries the rest

	Convertible note	SAFE (YC post-money form, 2018)
Legal form	Debt	Neither a share nor debt, in Oklo’s analysis
Interest	Accrues; Carta’s median was 7% in Q1 2025	None
Maturity date	Yes; 18 months in the KISS debt version	None
What the valuation cap fixes	A price per share if written pre-money, so later notes dilute every holder	The holder’s percentage after all SAFE money, so later SAFEs dilute only founders and option holders
Rank in a sale or wind-down	Repaid before any equity	Behind debt and unconverted notes; level with preferred stock
Usury law	Applies; in New York a corporate loan under $2.5M charging over 25% a year is void	Does not apply: no loan
US GAAP	A liability	Often a liability under ASC 480, remeasured at fair value
Share of Carta pre-seed rounds, Q1 2026	7%	93%

Source: Y Combinator post-money SAFE form, user guide and comparison page; Carta (2025, 2026); Coyle and Green (2018); A&O Shearman; Adar Bays v GeneSYS ID (N.Y. 2021); Oklo Inc., Form S-1 (2024). The SAFE share is 100% less the note share (our arithmetic).

What is a SAFE note, and how did it replace the convertible note?

A SAFE note is a claim on shares whose price is set later. Under YC’s post-money form, an equity financing makes the SAFE automatically convert into preferred stock, at the round’s price or the lower Safe Price that the cap sets. A sale, direct listing or IPO pays the holder the greater of its money back and its as-converted value. A wind-down returns the purchase amount “subject to the liquidation priority” the form sets out (Y Combinator, form). Nothing accrues in between and nothing falls due.

The word “note” is a misnomer, because a note is debt and a SAFE is not. Filers use it anyway. Oklo’s S-1 described “SAFE Notes” that let investors buy equity at a negotiated price now “with no set time for conversion”. The SEC’s investor office warned crowdfunding buyers in 2017 that “SAFEs are not common stock” and that a SAFE whose trigger never occurs may never convert (SEC, 2017).

The SAFE replaced the note by keeping its flexibility and dropping its debt. Y Combinator moved its startups onto notes before it moved them off. In Paul Graham’s account, “In 2010 we advised startups we funded to switch to convertible notes, which have since become the norm” (Y Combinator, 2013). The appeal was speed and flexible pricing: “if you wanted you could have a separate note with a different cap for each investor”, Graham wrote in 2010 (Graham, 2010).

The debt features were the price of that flexibility. John Coyle, a law professor at the University of North Carolina, and Joseph Green, an editor at Thomson Reuters Practical Law, name two. The notes “accrued interest while they were outstanding”, and the maturity date let investors press “to extract favorable concessions from the company in some cases” (Coyle & Green, 2018). On 6 December 2013 YC published the SAFE, written by its partner Carolynn Levy, which Graham called “essentially convertible debt without the debt”. His reason was legal form, because “the law cares what things are nominally”: a note needs a term, “which in California can’t be too long”, and “an interest rate not too far from market rates”.

Adoption took years. In a 2018 survey of 326 startup lawyers, Coyle and Green found priced equity estimated at 50% of seed financings, notes at 36% and the SAFE plus 500 Startups’ KISS at 14%. By the first quarter of 2025, SAFEs made up 90% of pre-seed rounds on Carta and 82% of the money (Carta, 2025). A year later notes were down to 7% of rounds and 8% of dollars (Carta, 2026). The two sources measure different things, lawyers’ estimates that include priced rounds against one platform’s data on unpriced ones, so they show the direction of the switch rather than its exact size.

Why does a post-money SAFE dilute founders more?

Because it fixes the investor’s percentage, and someone else has to give up the shares that hold it. YC rewrote the SAFE in 2018 because founders had begun to raise whole seed rounds on it. Its user guide describes SAFE financings as “independent seed rounds capable of providing multi-year runways, rather than shorter-term bridges” (Y Combinator, user guide). Under the original form, “The safes all diluted each other”. The post-money SAFE states the cap after all SAFE money, so “the safes are not diluted by each other”. The form sets the conversion price at “the Post-Money Valuation Cap divided by the Company Capitalization”, a capitalization that counts every converting SAFE.

Holding a percentage fixed while issuing the shares that pay for it produces a geometric series. If the SAFEs must end with a share s of the company, issuing s times the existing shares leaves their holders below s, and the top-up dilutes them again. The total converges on the existing shares times s + s² + s³ + …, which equals s ÷ (1 − s). The textbook condition is that “the absolute value of r must be less than one for this sequence of partial sums to converge to a limit” (Wikipedia). Here s is the SAFE money divided by the post-money cap, so as the money approaches the cap the founders’ share runs to zero.

The number to track is that s: the sum, across every SAFE outstanding, of each purchase amount divided by its post-money cap. YC’s comparison page does the sum itself: “Five $100k SAFEs at a $5M cap is 10% sold, not 2%” (Y Combinator). Carta’s 2025 median caps were about $10M for rounds of $250,000 to $1M and $15M for rounds of $1M to $2.5M (Carta, 2026). At those caps, a $1M round sells 10% of the company and a $2.5M round 16.7%. Graham’s own caveat applies: “valuation caps aren’t actual valuations”, so a cap tells a founder the ceiling on the conversion price and leaves the methods investors use to value a startup for the priced round.

The same money costs founders more on a post-money cap, and the gap widens with every dollar

The company is hypothetical: 10M fully diluted shares, 9M held by founders and 1M by option holders and the pool, raising money in tranches before its priced round. The post-money SAFE carries a $10M cap; the pre-money SAFE and the note carry a $9M pre-money cap, so the first $1M buys 10% on all three. The note accrues 7% simple interest, Carta’s median, for 18 months and converts with its interest.

Raised before the priced round	Post-money SAFE, $10M cap	Pre-money SAFE, $9M cap	Note, $9M cap, 7% for 18 months
$1.0M	90.0%	90.0%	89.1%
$2.0M	80.0%	81.8%	80.3%
$3.0M	70.0%	75.0%	73.1%
$4.0M	60.0%	69.2%	67.1%
$5.0M	50.0%	64.3%	62.0%

Source: our calculation for a hypothetical company. Share held by founders and option holders after conversion, before the priced round’s new money. Pre-money cases convert at $0.90 a share ($9M ÷ 10M shares); the note converts its principal plus 10.5% of interest.

At $3M the post-money SAFE converts at $0.70 a share, against $0.90 on the pre-money basis, and issues 4.29M shares instead of 3.33M. Measured against a pre-money SAFE, the note’s interest costs the existing holders 1.9 points at $3M and the post-money basis costs them 5.0 points; at $5M the post-money gap reaches 14.3 points. The 2018 form does hand something back: its cap is not “post” the option pool created in the Series A. SAFE holders share that dilution, YC explains, “because otherwise, the safes would be forcing the founders to bear all of the dilution for two rounds of hiring rather than one”. The table above stops before the priced round and leaves that offset out.

What do a convertible note’s interest and maturity date cost?

The interest costs little; the maturity date can cost a lot if the priced round runs late. Carta’s median note rate was 7% in the first quarter of 2025, down from 8% in the second quarter of 2024. The KISS, a model note 500 Startups drafted in 2014 (500 Startups, 2014), “accrues interest at a rate of 5%, matures in eighteen months” in its debt version, as Coyle and Green describe it. Seven percent for 18 months adds 10.5% to the amount that converts, worth 0.9 points of ownership at $1M in the dilution table.

Carta put the median wait between a seed round and a Series A at 616 days in the second quarter of 2025 (Carta, 2025). The median company raising a Series A in the fourth quarter of 2024 had waited 774 days since its previous round, and a quarter of seed-to-A companies waited more than three years (Carta, 2025). An 18-month note issued alongside a seed round would fall due 68 days before the median company’s Series A on the first measure and 226 days before it on the second.

Carta’s explainer states the consequence: “If the note hasn’t already converted into equity by the maturity date, the company typically is required to repay the noteholder’s principal investment plus interest” (Carta, 2024). Neither side expects repayment, Coyle and Green note, which is why the date works as a bargaining point. They also found twelve survey respondents who “like to add a maturity date to the SAFE”, making it “basically just a convertible note”. Ranking matters too. In YC’s summary, “Debt is repaid before any equity if the company is sold or wound down”, and the post-money form places the SAFE’s cash claim behind “convertible promissory notes” and level with preferred stock.

Can a convertible note break usury law?

In New York, a public company’s note did. On 24 May 2016 Adar Bays, a Florida lender, lent $35,000 to GeneSYS ID, a publicly held maker of medical supplies, on a one-year note at 8% interest. The note converted into stock at a 35% discount to the lowest trading price of the previous 20 days. On 28 November 2016 Adar Bays asked to convert $5,000 of debt into 439,560 shares, and GeneSYS refused. In 2021 the New York Court of Appeals held that such a conversion option’s value counts as interest, and that a criminally usurious loan is void: “We answer both questions in the affirmative” (Adar Bays v GeneSYS ID, 2021).

New York’s statutes, as the court summarised them, cap loans between $250,000 and $2.5 million at 25%, the criminal rate, and exempt loans of $2.5 million or more. A corporation can plead criminal usury, and the remedy is total: the loan is void, “resulting in the uncollectability of both principal and interest”. Adar Bays did not dispute GeneSYS’s figure that the 35% discount “would yield to Adar Bays a 54% nominal gain relative to the principal converted”. On the same arithmetic, the 20% discount Coyle and Green call typical would be worth a 25% gain on conversion, New York’s criminal ceiling (our arithmetic).

That last step goes beyond what the court decided. The ceiling is an annual rate, and the court counts an option’s value only “to the extent such value, when measured at the time of contracting, can be reasonably determined”. GeneSYS’s stock traded every day, while a seed note’s discount applies to a priced round that may never happen, and we know of no ruling that applies Adar Bays to one. The risk is real enough to check, but unproven for a seed note. On this point the safe vs convertible note choice is simple: a SAFE involves no loan, which is what Graham meant by the law caring about form.

Is a SAFE a liability on the balance sheet?

Often, under US GAAP. A SAFE creates no debt in law, and it can still sit on the balance sheet as a liability, because the post-money form pays the holder the greater of its purchase amount and its as-converted value in a sale.

Oklo, a developer of fast fission power plants that went public in May 2024 by merging with AltC Acquisition Corp., shows the result. Its S-1 found that its SAFEs were “not legal form of an outstanding share or legal form debt (i.e., no creditors’ rights)”. The cash-out on a change of control still “requires the SAFE Notes to be classified as a liability pursuant to ASC 480”, because a change of control lies outside the company’s sole control (Oklo, 2024). At 31 March 2024, $42.6M of SAFE principal, at caps of $300M and $500M, sat on the balance sheet at $73.1M, 1.72 times the cash raised. The quarter’s remeasurement loss of $16.8M came to about 70% of its net loss for the quarter (our arithmetic).

The liability rises with the company’s prospects, so good news reports as a loss. Oklo’s caps are far above a seed company’s, and its classification turned on its own terms. A private company that needs audited accounts should expect its auditors to ask the same question; one that never prepares GAAP statements may not meet it at all.

Is a post-money cap worth its cost to founders?

YC argues that it is, because founders lost more under the old form when they could not see the cost. Under original safes, its guide says, founders “often ended up selling a lot more than they really wanted to, when they didn’t have to”. Under the new one, “calculating dilution and ownership requires little more than simple addition and division”. Investors also pay for the certainty: the guide’s example investor accepts a $5.5M post-money cap, implying a $5M pre-money valuation, instead of a $4.5M pre-money cap.

YC has both facts right. A cost the founder can compute beats one hidden in a recursive loop, and a higher cap can offset part of the gap in the dilution table. The offset is fixed once, though, on the first SAFE, while the share sold grows with every SAFE after it, and a cap negotiated for the first $1M does not price the fifth. Coyle and Green add that a SAFE can become a note “with just a few keystrokes”, so the safe vs convertible note comparison that matters is the one in the documents.

Safe vs convertible note: which should a founder choose?

For pre-seed and seed money, the SAFE. It carries no interest, no maturity date and no loan for usury law to reach. Its cost is the running share sold, every purchase amount divided by its post-money cap, which founders and option holders absorb in full; on the same $10M post-money cap the second $1M costs them 10 points, against 8.2 on a pre-money cap. A note fits as a dated bridge to a round already under negotiation, provided its maturity runs past both the company’s remaining runway and the 616 days Carta found as the median wait between a seed round and a Series A.

References

• 500 Startups (2014). Raiten, G., 500 Startups Announces KISS, 3 July 2014.
• A&O Shearman. Convertible notes and SAFEs (web guide).
• Adar Bays, LLC v GeneSYS ID, Inc., 37 N.Y.3d 320 (2021).
• Carta (2024). Convertible securities (Carta Learn).
• Carta (2025). State of Pre-Seed: Q1 2025; State of Private Markets: Q4 and 2024 in review; Dowd, K., Series A Funding Slides in Q2 2025.
• Carta (2026). Shad, H., State of Pre-Seed: 2025 in review; State of Pre-Seed: Q1 2026.
• Coyle, J. F. and Green, J. M. (2018). The SAFE, the KISS, and the Note: a survey of startup seed financing contracts. Minnesota Law Review Headnotes 103, 42.
• Graham, P. (2010). High Resolution Fundraising.
• Oklo Inc. (2024). Registration statement on Form S-1, filed 20 June 2024.
• Wikipedia. Geometric series.
• U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy (2017). Investor Bulletin: Be Cautious of SAFEs in Crowdfunding, 9 May 2017.
• Y Combinator (2013). Graham, P., Announcing the Safe, a Replacement for Convertible Notes, 6 December 2013.
• Y Combinator. Post-Money Safe User Guide; Postmoney Safe: Valuation Cap Only (form); SAFE vs. Convertible note vs. Priced Equity Round (web page).

The figures come from the filings, court decision, survey, model documents and platform data listed above. Amounts and percentages without a citation are computed by CX Cash from the documents and data above, and the company in the dilution table is hypothetical. The usury discussion describes New York law and the accounting discussion US GAAP; neither is legal, tax or accounting advice.